The past week saw quite a few developments in the oil and gas space. BP Plc. (NYSE:BP) signed a letter of intent to develop a disputed oil field in Iraq. Also, Anadarko (NYSE:APC) announced that it is talking to buyers about signing long-term liquefied natural gas (LNG) supply contracts for its Mozambique project. Meanwhile, Chevron (NYSE:CVX) signed an agreement with the Brazilian federal public prosecutors to settle lawsuits related to the oil spill incident that took place in an oil field off Brazil’s southeast coast in November 2011.
BP recently signed a letter of intent with the Iraqi central government to help revive its giant Kirkuk oil field in Northern Iraq. The revamp of more than 80 years old oil field is a part of Iraq’s larger plan to boost its oil production over 9 million barrels per day (bpd) by 2017. This could potentially result in a long-term contract for the company similar to the technical service agreement it already has for the largest oil field in Iraq, Rumaila. Production from the Kirkuk oil field has dropped significantly from around 900,000 bpd in early 2000s to just over 250,000 bpd today. However, it is still expected to contain around 10 billion barrels of oil.
Potential value addition to BP in case it is able to clinch a long-term technical service contract with the central government will depend upon the terms of the agreement, such as base and plateau production rates, and the compensation per barrel of oil produced above the base production rate. In order to get a ballpark idea, we can assume that BP can achieve a plateau production rate of 900,000 bpd with a base of 300,000 bpd. In this scenario, the contract would add almost $4 billion to BP’s total value, assuming a compensation rate of $2 per barrel.
However, there are geopolitical risks associated with the project, as it falls in a swathe of land over which the Iraqi central government and the Kurdistan region government (KRG) are locked in a dispute. The KRG has opposed Baghdad’s deal with BP and maintained that any such deal would be unconstitutional as long as the dispute over sovereignty of the province continues. Moreover, infrastructural bottlenecks and the nature of technical service agreements awarded by the Baghdad government also make the project less attractive. Therefore, we believe that even if BP is able to secure a long-term deal for developing the Kirkuk oil field, there would be very little for its investors to cheer about. (See: BP Agrees To Develop A Disputed Field In Iraq)
Anadarko is talking to buyers about supplies of gas from its planned project off the coast of Mozambique where some of the world’s biggest gas reserves have been discovered since 2011. Global demand for natural gas is expected to grow by more than 2% annually over the coming years as it is expected to increasingly replace coal in power generation. The fact that most of this growth in natural gas demand is expected to come from the fast-growing Asian markets makes the location of Mozambique gas reserves extremely attractive for investment.
Anadarko is the operator of Offshore Area 1, which covers approximately 2.6 million acres in the deepwater Rovuma Basin. The company and its partners have drilled more than a dozen successful wells on the block, which are estimated to hold around 35 to 65 trillion cubic feet (tcf) of recoverable natural gas. Additional discoveries can further increase the estimated resource base in the region, which can potentially enhance future development options as well. Anadarko holds a 26.5% share of these resources even after the recent sale of its 10% stake in the project. (See: Anadarko Rakes In $2.6 Billion From African Asset Sale)
The natural gas reserves off East Africa are so massive that they easily dwarf demand from the local markets. Therefore, liquefying and exporting natural gas is the most viable way to tap these resources. However, development of an LNG project and its supporting infrastructure, such as pipelines to transport the gas produced from offshore fields, is extremely capital intensive. Anadarko estimates the Mozambique LNG project to cost between $25 and $30 billion.
Because of the hefty price tag and huge uncertainties over LNG pricing across various international markets, capital financing of the Mozambique LNG project hinges on Anadarko’s ability to sign these long-term supply agreements with buyers. Therefore, this phase is extremely crucial to economic feasibility of the project as well as the value it can add to Anadarko’s portfolio. (See: Anadarko To Sign Supply Agreements For Its Mozambique Gas)
Last week, Chevron agreed to pay 95.2 million Brazilian reais ($42 million) to settle lawsuits related to an offshore oil spill that took place in November 2011. This is considerably less than the $20 billion in damages that the Brazilian federal prosecutors had sought initially. The value of the settlement fell primarily due to the reports filed by the Brazilian government’s oil and environment regulators that concluded that the damage from the spill was over estimated initially. According to the accord, which is subject to the approval of a federal court, the payment would cover all the damages related to the spill incident at Frade oil field off Brazil’s southeast coast. Notes: